Classification of Expenditure:
Expenditure can be classified into three categories:
1. Capital Expenditure. It means an expenditure which has been incurred for the purpose of obtaining a long-term advantage for the business. Such expenditure is either incurred for acquisition of an asset (tangible or intangible) which can later be sold and converted into cash or which result in increasing the earning capacity of the business or which affords some other advantage to the business. In ether words, such an expenditure does not grow out or pertain to the running of the business proper.
Following are some of the examples of Capital expenditure:
(i) Expenditure incurred in increasing the quality of fixed assets, e.g., purchase Of additional furniture, plant, building for permanent use in the business.
(ii) Expenditure incurred in increasing the quantity of a fixed asset, e.g., expenditure incurred for increasing the useful tile or capacity or efficiency of a fixed asset.
(iii) Expenditure incurred for substitution of a new asset for an qdsting asset.
(iv) Expenditure incurred in connection with the purchase, receipt, erection of a fixed asset, e.g., the cartage charges paid for bringing to the factory plant and machinery purchased, erection charges of a new plant.
(v) Expenditure incurred for acquiring the right of carrying on a business, e.g., purchase of patent rights, copy rights, goodwill etc.
2. Revenue expenditure. An expenditure that arises out of and in the course of regular business transactions of concern is termed as a revenue expenditure. It may simply be termed as ‘Expense”. Following are few examples of revenue expenditure:
(i) Expenditure incurred in the normal course of running the business, e.g., expenses of administration, cost incurred in anufacturing and selling the products.
(ii) Expenditure incurred to maintain the business e.g., money spent for repairs of existing fixed assets or cost of stores consumed, etc.
(iii) Cost of goods purchased for resale.
(iv) Depreciation on fixed assets, interest on loans for the business.